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Cost inflation

27 November 2014 By Peter Thal Larsen

Takata Corp is a medium-sized company with a massive problem. U.S. regulators are pushing for a nationwide recall of cars fitted with the Japanese group’s air bags, which have been blamed for the deaths of five drivers. The costs pose a serious threat to the company’s financial stability.

Takata has set aside almost 78 billion yen ($664 million) over the past two years to cover the expense of replacing airbags in roughly 9 million cars. Expanding the recall to the whole of America would cost the company at least another 70 billion yen, Nomura analysts estimate.

But Takata’s woes don’t stop at the U.S. border. The recent death of a driver in Malaysia has spurred some manufacturers to issue wider recalls. With its air bags fitted in roughly one in five cars worldwide, Takata’s liabilities could inflate. Victims or their families will demand compensation. And U.S. regulators are bound to whack the group with a hefty fine. Toyota handed over $1.2 billion earlier this year due to sticky accelerator pedals that may have caused crashes.

Takata could limit the damage. Many of the vehicles being recalled are as old as ten years, so fewer drivers may respond. The company has so far barely tapped into the reserves it has set aside for repairs. Manufacturers may decide to share some of the costs, and fines and financial claims could stretch over several years.

Even so, the financial burden could overwhelm a company which generated operating cash flow of 30.6 billion yen in its last full financial year. Though Takata has no net debt, banks will be reluctant to extend new credit until they can quantify the full extent of the company’s liabilities.

Takata shares are down 57 percent this year, yet the company’s market value is still over 100 billion yen. Investors appear to be betting that, despite the safety concerns, carmakers will continue to rely on a company which is one of only three large air bag manufacturers in the world. The Japanese government could also step in. Without help, Takata’s financial cushion looks worryingly thin.

 

 

 

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